Trading anything too often is bad for you

Is Buy and Hold Dead?

Recent research indicates that rapid trading in and out of higher volatility funds negatively impacts returns.

Looking at 5 and 10 year numbers, it is frustrating to see the International and US indices with lacklustre returns.
And even Canadian indices, while recovering over the last few months, have been disappointing. So what to do - should you
make major shifts in your investment strategy, asset allocation or chosen investment vehicles?

We think the answer is actually to avoid making major changes, but rather to slowly review and fine tune your
investment strategy. We continue to suggest that reviewing your asset allocation and adjusting it as your age and risk
tolerance change will have the most significant impact on your investment success. And while we pride ourselves on our
recommended list of investments, security selection (the actual investment vehicles that are chosen) will have a lesser
impact on your returns than the length of time you hold the investments.

Recently, John Bogle, a long time proponent of indexing, and of low fee investing, surprised the industry by presenting
research that indicates that the current trend toward Exchange Traded Funds seems to be hurting investors.
This is similar to past industry research that suggests that many Mutual Fund Investors lag the performance of the funds
they own, because they buy when funds (and markets) are high, and then sell low.

ETFs promised to do better for investors, by keeping costs lower, and are a rapidly growing, but still small part of the
investment landscape in Canada:

(Note: in this chart, both categories are understated, as Canadian investors can access the much larger US ETF
marketplace, and the Canadian IFIC fund numbers do not include all fund companies.)

So is it that ETFs are harming investors, or is it how investors and their advisors use ETFs? The answer is clearly
that they are being traded into and out of too often, just as has happened too often with mutual funds. Here are some of
Bogle's Comments:

"Investor lag* in the ETF category is large and significant," said Bogle. "The … mutual funds
have a lag here and there, but in general, come very close to the markets they are in. "

"So we have evidence — strong evidence — that exchange-traded funds, because of the timing that goes on in
them, are not acting in the best interest of investors. Or, that investors are not acting in their own best interests,
which may be a better way to put it."

* Investor lag is the difference between the fund's return and the return the investor actually received. The difference
stems mainly from the timing of the purchase and sale of the fund. An additional drag not calculated in the Bogle article would be the bid-ask spread and commissions.

Data for the study were compiled by Morningstar. The study looked at monthly cash flows and monthly fund and ETF returns.
Bogle noted that this is not a precise format, as daily cash flows into and out of the funds could skew the results:

"Is that way of aggregating data (on a monthly basis) precise? No it is not," said Bogle. "But I'm persuaded in the
absence of compelling data on the other side that these data are telling us something that is worth knowing … that
mutual fund trading is about as valuable as trading individual stocks, which is to say, not valuable at all,
and harmful to your returns."

Coincidently, a recent Globe and Mail article, looking at the long term experience of US fund investors noted that the
investors did better when in balanced funds. This makes complete sense, since investors
are more likely to choose conservative vehicles when times are bad (and prices are low) and move out of them after a good
period of returns, and then move into the higher risk vehicles when times are good, just as those move out of favour again,
inevitably selling higher risk vehicles when they are low, and moving back into lower volatility funds. So essentially, they
bought high and sold low on their higher risk investments and bought low and sold high on their balanced investments.

We see it as part of our job to reverse this cycle. To discourage clients from selling when markets are low, and also
to discourage major equity purchases when markets are high. Whether we use mutual funds, ETFs or other vehicles to build
your portfolio, this process can be aided by having a formal asset allocation strategy in place, as part of your
financial plan. And the moral of this story, is to avoid chasing fads, keep the number of trades and switches to a
minimum, and look at long holding periods as the way to go.

...coming soon, a discussion of bid ask spread and commissions and overall holding period costs...

More on ETFs and mutual funds

Templeton performance watch

Templeton Funds Reviewed at the Annual Investmest Forum

Many years ago, we put Templeton International Stock fund on a performance watch. Its performance had dropped from 4 stars
on Morningstar to 2 stars. After a long review process and meetings with management, we decided to stay the course and
eventually, we were rewarded for our patience with stronger relative performance.

A great deal of the concern investors have had recently about global investing, is simply that Canadian investments
have faired better over the last 10 years. Why take the currency risk when Canada is fairing better in this economy?
Well, just because Canadian markets have done better than the global markets over the last 10 years doesn't mean they
will continue to do better. There have been other decades where Canada underperformed the rest of the world.

While we believe the long term fundamentals of the Canadian economy are strong, we believe that Canadians should not focus solely on the Canadian market for their
investments. In addition, more
than just your investment account is riding on the Canadian economy. The value of your home, employment security and the
value of your currency are also riding on it. That means you already have a lot of eggs in one basket.

We generally recommend clients
have about 40% of the equity portion of their portfolio invested outside of Canada. And, if like many investors, the proportion of
non-Canadian investments has fallen in recent years you may need to focus your buying in the global area. Luckily, investing
outside Canada has become relatively cheap lately.

So, given the need for solid reasonably priced non-Canadian investments for our clients, our review of Templeton Growth
will necessitate much discussion and analysis over the next few weeks. Should we change our recommendation on Templeton Growth or any other fund on
our recommended list, we will be in touch with clients directly.

More on Franklin Templeton Forum 2009

Investment Fraud

With the recent high profile arrest of Montreal scam artist Earl Jones, many Canadians are rightly wondering who they
can trust. Well first, please notice that we didn't say Montreal "Investment Advisor" like most of the media headlines did.
Calling Mr. Jones an "Advisor" is like calling someone who steals kidneys a "Doctor". Mr. Jones was not licensed as an
advisor by any provincial or federal body, and his "firm" was not registered either.

We are fortunate in Canada that we have strong regulatory bodies that govern the practices of investment firms and
their advisors. Canadian investors can protect themselves by checking with those bodies to ensure that their advisor/firm is
registered and in good standing. The Investment Industry Regulatory Organization of Canada (IIROC), our country's main
investment industry watchdog, has a new brochure with details on what
IROC does and why it matters to you.

At ScotiaMcLeod, we are proud to be held to the highest standards of professionalism and conduct, to help protect you
and your investments. We take our reputation very seriously and so should you. Your advisors are registered provincially
with the Ontario Securities Commission (OSC) (and most other provincial bodies, as well). The OSC has a good website,
Check before you invest, where you can
check the registration of an advisor or firm.

More on investment industry regulation

Welcome (back) to David Hillier

We want to send out a warm welcome to David Hillier, who is rejoining the team after a sojourn to the US. Many of our
long standing clients will recall Dave from when he worked with the team in 2002
(see MFR189). Dave has been busy in the intervening years. He now
holds the Financial Management Advisor (FMA) designation and just this month, David became a Fellow of the Canadian
Securities Institute (FCSI). Congratulations, Dave and welcome home!

Recommended reading: Investment Portfolio Quarterly - Summer 2009

Economic Outlook: What Kind of Recovery Will Shape Market Performance?

Portfolio Strategy: Global Strategy Outlook – Summer Update

Canadian Equity Strategy: Sprinting to Start a Marathon?

Feature Article: What You Need to Know About Exchange Traded Funds
(Note: this article ignores ETF Bid Ask spreads and is not a comprehensive review, for a more detailed article,
see ScotiaMcLeod Fund Research Monthly, or visit our
ETF page)

HST Update

Fund News

AIC's founder, Michael Lee-Chin has announced he is selling his mutual funds to Manulife. Lee-Chin will continue to manage the funds on behalf of Manulife through his privately held company, Portland Holdings.

Naturally, we have all AIC funds on a performance watch, and will advise clients directly on any change recommendations and future manager changes. We can expect Manulife to merge and consolidate several funds to ensure a consistent and better performing lineup.

In keeping with our comments on not so legitimate "advisors", in this video clip, The Daily Show's Jon Stewart takes on Mad Money's Jim Cramer about making bad calls and giving bad
advice, as well as slamming cable news' financial reporters taking CEOs at their word. Jon Stewart practises what
he preaches. He calls Cramer on every dubious statement, with back-up video of Cramer making statements to the contrary. It is
a funny at times, yet sad commentary about the financial and news industries' foibles and the financial disaster that came
out of that environment. (Our apologies about the commercials The Comedy Network makes you sit through to watch the clips):

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